Richmond-area recovery will be slow, local economists say

The long, slow slog toward economic recovery is likely to remain long, slow and sloggy in 2012, local economists and investment advisers say.

Things aren't likely to get worse, but they don't seem likely to improve at a fast pace, either, local experts say, especially with the economy still being weighed down by high unemployment, a depressed housing market and a debt crisis in Europe that could ripple across the global economy.

"A lot of the issues that we all had to deal with in 2011 will continue into 2012," said Christopher J. Singleton, managing director of Kanawha Capital Management LLC in Henrico County.

"We expect the economic expansion to continue [in 2012], but it will probably remain grudging," he said

With 13 million Americans out of work and an unemployment rate at 8.6 percent in November — the lowest since March 2009 — a key question in 2012 will be whether consumers maintain enough confidence to sustain their spending, which powers 75 percent of the U.S. economy.

Dean Croushore, chairman of the University of Richmond economics department, thinks it could be another two years before consumers really feel confident.

"I think the fundamental story continues to be the debt that consumers have," he said. "They over-leveraged and paid the price in 2007."

At the same time, companies have found ways to gain productivity without adding to staff, said M. Bagley Reid, managing partner at Blue Edge Capital, an investment management firm in Henrico.

"A lot of our companies are running very lean, and their profit margins are high and expanding," Reid said. "They are able to do things more efficiently with what they have."

That's good for corporate profit growth, but not necessarily so good for employment growth, he said.

Last month, Wells Fargo Securities economists predicted the U.S. economy would add 1.5 million jobs in 2012, about 123,000 a month, a "disappointing pace."

"What we would really like is 300,000 jobs a month, and that would reduce the unemployment rate pretty rapidly," Croushore said. "But it will be more like under 200,000 jobs a month, and the [jobless] rate will slowly drop over the year."

Improved consumer spending could help spur the virtuous cycle that leads to more business investment and hiring, perhaps helping to unleash the enormous cash reserves — more than $2 trillion by some estimates — that businesses are holding.

"A lot of businesses have been reluctant to do that [invest and hire] because they want to make sure the U.S. economy really has traction," Singleton said.

Noting those cash balances, however, Kent Engelke of Capitol Securities Management in Henrico thinks 2012 will be a "year of positive surprises."

"We are suffering from crisis fatigue, and I can argue the new bubble is in risk and fear," Engelke said. "All fear a relapse of 2008 and 2009. The surface today is similar to that era, but in reality it is sharply different."

With cash balances high, interest rates at historic lows and consumers and businesses deleveraging, Engelke argues that the one thing missing is confidence, and he believes confidence will return as the election approaches this year.

Europe's ongoing sovereign debt crisis will remain a drag on confidence in 2012, with some economists predicting a modest global recession if the crisis leads to defaults. That could mean a slowdown in demand for U.S. goods exported to Europe, which accounts for about 2 percent of U.S gross domestic product.

"The real wild card [in 2012] will be Europe," Singleton said. "If they are not in a recession now, they are headed that way. That will affect the U.S. economy, but it doesn't mean we can't muddle through."

"It also adds to the uncertainty when businesses look overseas and see China slowing down a bit," he said.

China's economy was expected to grow around 9 percent in 2011, but could slow to around 7.5 percent in 2012. While that's still a fast pace of growth, the slowdown could be enough to hurt U.S. companies that do business there.